Incorporating is one of the biggest decisions a self-employed person or small business owner makes. It can save tax and add flexibility, but it also adds cost and paperwork. Here is a balanced way to think about it.
What incorporating changes
A corporation is a separate legal and tax entity. Income earned inside it is taxed in the corporation first. You are then taxed personally on whatever you take out as salary or dividends.
Potential advantages
- Lower tax on retained income. A CCPC earning active business income can claim the small business deduction on up to $500,000 of income per year. The combined federal and Ontario small business rate is currently about 12.2%, which is far lower than top personal rates. This mostly helps when you leave money in the company to invest or grow.
- Tax deferral. Profits you do not need personally are taxed at the low corporate rate until you withdraw them.
- Flexibility. You control when and how much you pay yourself, which helps planning.
- Limited liability. Generally, the corporation, not you personally, is responsible for its debts, though personal guarantees and certain liabilities still apply.
- Credibility. Some clients and contracts prefer working with a corporation.
Costs and downsides
- Setup and annual costs: incorporation fees, annual filings and a T2 tax return every year. See our guide to T2 deadlines and penalties.
- More bookkeeping: you need proper books, a business bank account and often financial statements.
- Payroll if you take salary: remittances and T4s.
- Less benefit if you spend everything you earn. If you need all the income personally, the deferral advantage mostly disappears.
- Some professionals have rules. Regulated professionals such as physicians and dentists use professional corporations with specific requirements.
When it usually makes sense
Incorporating tends to be worth considering when your business is profitable, you do not need to spend all of the profits personally, you carry business risk, or you plan to grow, hire or eventually sell. Many self-employed people wait until their net income comfortably exceeds their personal spending needs.
When it may not
If your income is modest, you are just starting out, or you would withdraw everything each year, staying unincorporated can be simpler and cheaper for now. Keep in mind that HST registration depends on your sales, not on whether you are incorporated. Our HST guide explains the small supplier rules.
Federal or Ontario?
You can incorporate federally or in Ontario. The right choice depends on where you operate and how you want your name protected. It is worth discussing before you file.
Our incorporation service covers the decision, the filing and the setup afterward, and if you already earn self-employment income you can compare with our self-employed tax accountants.
This article is general information, not tax or legal advice. Rates and limits change, so confirm current figures before deciding.
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